INTEGRATION APPROACHES

Ellis & Lamont (2004) test different integration approaches by combining the works of Haspeslagh

& Jemison (1991), Nahavandi & Malekzadeh (1998) and Marks & Mirvis (1998) in order to form a framework of different ideal integration approaches. Haspeslagh & Jemison (1991) developed a capabilities-based contingency framework that identified three primary integration approaches, which were preservation, absorption and symbiotic. They combined this framework with the work of Nahavandi & Malekzadeh (1988) who employed a culturally based perspective to identify various modes of acculturation based on two primary dimensions from the acquiring firm’s perspective, which were the degree of relatedness between the two firms and the degree of tolerance multiculturalism by the acquiring firm.

Marks & Mirvis (1998) discuss the ways by which firms combine their operations following an acquisition. By using the degree of post-combination change in the acquiring and acquired firm as the basis of their classification scheme, they identify and describe the attributes necessary in an organization to manage five major integration approaches, which are absorption as well as reverse merger/assimilation, preservation, best of both and transformation. All three works offer relatively similar integration approaches in terms of the extent to which and how firms are reconfigured after the acquisition. These approaches were then combined by Ellis & Lamont (2004) and formed in to a graphical depiction which will be presented later in this chapter.

They differentiated the integration approaches by two factors. These were the need for organizational autonomy and the need for strategic interdependence. The five approaches they included in their framework were Holding, Preservation, Symbiotic, Absorption and Transformation. They further emphasized the overlap between the three different works by specifying in their framework how the definitions between them are related. Ellis & Lamont (2004) continue that these parallels or characteristics associated with the different integration approaches represent a central phenomenon, which implies that there appears to be an ideal way to effectively manage each approach.

The Preservation approach which is characterized by limited strategic interdependence of the firms involved but a high need for operational autonomy in both firms, allows both firms to continue to operate independently after the acquisition. The approach involves very little change in either of the two firms, given that one of the primary drivers of achieving post-acquisition success is the ability to keep intact the strategic capabilities being obtained from the target firm. It follows that this approach demands an integration tasks that allow for continuing differences within the target firm, enabling

autonomy and decision-making authority to the target firm management and providing resources to improve the operations of the target firm as needed. (Ellis & Lamont, 2004)

The Absorption approach represents conditions in which the need for operational autonomy in both firms is low and the need for strategic interdependence is high. The primary goal for the acquiring firm in this approach is to fully consolidate the activities of both firms by assimilating the target firm to its operations and culture. It is important to proceed in a planned, consistent and fast paced manner to minimize the level of disruption and uncertainty surrounding the post-acquisition integration process, as the process involves a great degree of change in the target firm. The approach can pose significant challenges and therefore it requires careful preliminary planning for key integration issues, a transition structure to oversee the integration efforts, communication during the process and clear deadlines as well as pressure for change. These manners of acquisitions are likely motivated primarily by the need to lower costs or improve the firms market position. (Ellis & Lamont, 2004)

The Symbiotic approach is used in situations where there is a critical need for both operational autonomy and strategic interdependence. It involves a period of initial preservation and then gradual blending of best practices in both firms. The integration process in this case requires that both firms undergo a degree of change, in order to create a combined firm that reflects the core competencies and leading practices of both firms. It is also important to develop an atmosphere of cooperation between members of the two firms, as there is first a need to coexist and learn from each other before amalgamating both firms and making major strategic changes in the two firms. The approach therefore requires some operational responsibility by target firm managers, a transition management structure to coordinate integration activities and help identify best practices, and a slower pace to deal with the challenges created in finding a balance between the need for boundary protection and boundary permeability. (Ellis & Lamont, 2004)

Primary business motivations for this approach can be a need to increase the size of the firm, leverage complementary product offerings, expand geographic market coverage and achieve cost-based synergies. Actions to achieve these synergies include actions designed to remove boundaries between the two firms, such as the consolidation of manufacturing and distribution activities and eliminating duplicative costs in areas of the combined firm. (Ellis & Lamont, 2004)

Ellis & Lamont (2004) continue that, while the symbiotic approach necessitates some changes in both firms as best practices are adopted, on occasions the integration process involves significant and fundamental changes in the organizational culture and operating practices of both entities. When both

firms are essentially broken down and rebuilt in to a new whole in the integration, the mode is referred to as a Transformation approach. It can therefore be seen as a special case of the symbiotic approach.

Haspeslagh & Jemison (1991) describe that the approach requires the newly formed organization to reinvent itself by founding an entirely new organization. Instead of combining the best of both firms, it is necessary to build the organizational culture from ground up, by creating a new set of values and a way of operating. Ellis and Lamont (2004) write that in order to facilitate the development of new practices, routines, organizational culture and many other issues, the firm needs to manage the process in an inclusive and inventive manner. This makes it necessary to create a blueprint of the new organizations structure and culture among other things, clearly forming the strategic vision of the new company as well as how the decision-making process of the firm works, involving both firms in this process and establishing a temporary management structure to oversee and coordinate the integration efforts. (Ellis & Lamont, 2004)

The Holding approach involves a situation where the acquiring firm acts basically as a holding company without any intention of integrating the two firms. It is characterized by a lower need for organizational autonomy and strategic interdependence. The acquired firm is likely kept at an arm’s length and/or disintegrated as a cultural entity. It is possible that on occasion this approach differs from the preservation approach in that the integration choice may not be necessarily driven by a need for operational autonomy or organizational separation, but from a lack of concern for integration the decision-making process. It can also be seen as a diversification strategy, where the company makes the decision regarding the distribution of new acquisitions solely on the basis of financial considerations. Top management delegates a large share of its product planning and administrative functions to the divisions and concerns itself largely with coordination, financial problems and with building up a balanced portfolio of products with the corporate structure. (Ellis & Lamont, 2004) (Ansoff, 1957)

According to Ellis & Lamont (2004) the holding approach is closely related to holding companies, but they do not go in to further detail as their study dealt with integration approaches. As there no integration per se is involved an acquisition where a holding company purchases a target, it provided no further value for their study. As a form of acquisition, it is however noteworthy and common. A holding company does not have any operations or activities, it only own assets. These assets can be stocks in other companies, limited liability companies, limited partnerships, private equity funds, publicly traded stocks, bonds, real estate, song rights, brand names, patents, trademarks, copyrights or anything else of value. If the assets that are being owned are mostly stocks in other companies, to the extent that the holding company owns a majority share in the company in question, these are by

definition stand-alone companies located in any possible country, staffed by local employees, with their own bank accounts, offices, manufacturing facilities and more. (Kennon, 2018)

The parent company can influence the subsidiaries in such a way that the CEO and his/her subordinates can determine the CEOs and key executives among the other companies the parent company controls. The function of the parent company in the whole is largely financial. They can lower their capital cost through the overall strength of the aggregate. They can for example issue bonds at highly reduced rates and then lend the money to their subsidiaries at rates that would not be possible for them to acquire if they were stand-alone companies. In this way, the interest expenses of the companies are reduced, and this in turn increases both return of equity and return on assets.

(Kennon, 2018)

A clear connection can be draws between the article of Ellis & Lamont (2004) and Zollo & Meier (2008) as the former studied the importance of fitting the integration approach the relationship and purpose of the acquisition and the latter proposed that there exist a logical connection between the different levels being analyzed in an acquisition. The levels discussed were the operational, transactional and firm level. In sum it can be described that the way the operational and process levels of the firms are integrated, and whether this is successful has a positive effect on the transactional level, which deals with the accounting results of the firm. The shift in this level has a clear effect of the firm level, which means the stock price and firm performance in the market.

3.5. Summary

To summarize, the different approaches to what happens in a company after the acquisition, and what theoretical aspects there are to look at how a company sees the acquisition process and value creation after the fact have been discusses. A comparison can be drawn between the theories of Trautwein (1990) and Haspeslagh and Jemison (1989) in considering the connection between motivations for acquisitions and the different approaches to integration. Although the two studies deal with two distinct subjects, the area of research is of course related. The different integration approaches are by definition systematic and process oriented, and therefore the efficiency theory and the market power theory are both good candidates.

If we further combine the studies of Ellis & Lamont and Zollo & Meier as we described earlier, the motivational aspects of the decision-makers can be drawn in together with different integration approaches, and that if the decision makers seek to make decision that maximize the efficiency of the

acquisitions, then it is in their interest to include the whole process, including integration in to their decision and expected results of the acquisition.